HOW TO IDENTIFY A FIRM THAT MAY NEED TRADE FINANCE PRODUCTS?

A reader recently sent Mr. Old Man an interesting question about trade finance and financial statements.
It sounds simple at first… but the topic can actually become quite broad if discussed in detail

Here is a short and practical answer.

Question

Dear Mr. Old Man,

This may be a genuine question, but would you kindly explain how to determine whether a firm needs trade finance products?

And how can the firm’s financial reports help support such assessment?

Thank you!

Best regards,
Huy

______

Answer

Dear Huy,

Thank you for your question.

Honestly, I’m not entirely sure my answer is exactly what you were asking, but here is my brief understanding.

1/ How to determine if a firm needs trade finance products?

If a company is involved in import or export business, it may use trade finance products such as:

• Letters of Credit (LC)
• Documentary Collections
• Bank Guarantees
• Pre-shipment or Post-shipment Finance
• Import Finance
• Factoring or Forfaiting

Of course, if the company has strong internal funding, it may not need financing from banks. However, it may still use international payment and trade services provided by banks.

2/ How can financial reports support this assessment?

From the financial statements, we may identify possible trade finance needs.

For example, if the balance sheet shows:

• Large accounts receivable (e.g. 60–180 days), the company may need export finance or receivables financing.
• Large inventory, it may need pre-shipment or inventory financing.
• Large accounts payable, it may need import finance products.

If the cash flow statement shows:

• Profitable business but weak operating cash flow, this may indicate cash is tied up in inventory or receivables, and trade finance products may help support working capital.

In short, trade finance is often needed when there is a timing gap between shipment of goods and receipt of payment.

Best regards,
Mr. Old Man